Conn's Tops; Guides Higher Again – Analyst Blog

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Conn’s Inc. (CONN) posted adjusted earnings per share of 36 cents in the second quarter of fiscal 2013, beating the Zacks Consensus Estimate by a penny. The earnings improved substantially from the year-ago level of 18 cents per share.

On a reported basis, earnings stood at 35 cents versus a loss of 10 cents recorded in the year-earlier quarter. Higher sales combined with efficient cost containment efforts aided the earnings in the quarter.

Inside the Headline Numbers

In the second quarter, the seller of home appliances and consumer electronics grew 10.9% year over year in revenues to $207.4 million, which also outperformed the Zacks Consensus Estimate of $203.0 million. The quarter’s revenue comprised net sales increase of 13.0% to $171.7 million in retail, and a 2.3% growth in finance and other charges to $35.8 million.

Same store sales increased 21.5% during the second quarter. The upside in retail sales was driven by higher average selling prices, increased furniture and mattress offering, and withholding of a portion of the unit volume from closed stores. In addition, the opening of a Conn’s HomePlus store in Waco, Texas in mid-June and the revamp of four stores also contributed to the growth.

Retail gross margin was 34.1% in the quarter, up 590 basis points year over year. Favorable shift in product mix, especially in the furniture and mattress categories representing 21% of total product sales, helped drive retail gross margin in the quarter. In the aforesaid category, the company witnessed significant sales and margin growth which was higher than the growth in the other categories. Margins also benefited from the removal of low price-point and low margin products.

Liquidity

Conn’s ended the year with cash and cash equivalents of $5.2 million, long-term debt of $238.9 million and stockholder equity of $382.3 million.

Guidance

The company raised its diluted earnings per share guidance for fiscal 2013 to $1.40–$1.50 from the earlier projected range of $1.30–$1.40. Prior to this, management’s guidance for fiscal 2013’s earnings per share was in the range of $1.20–$1.30.

Growth in same stores sales are expected at 10–15% (prior guidance was mid- to high-single digits). The company also plans to open as many as five new stores for the full-year.

Our Take

We remain optimistic on Conn’s owing to a set of bullish features which include strong same-store sales momentum, share gain in the challenging appliance market, ability to charge higher price points compared to its peers, strong margin improvement, unit remodeling and an increase in its credit portfolio balance.

The consecutive raise in earnings per share guidance for 2013 also reflects the company’s strong fundamentals. With about 12% comps growth in August, Conn’s also kicked off its third quarter on a positive note. Conn’s long-term prospect to garner 30% of product sales from its high-margin furniture and mattresses category will also bode well for its overall margins.

Conn’s which faces intense competition from bigger industry players like Best Buy Co. Inc. (BBY) and RadioShack Corp. (RSH)., currently carries a Zacks #2 Rank that translates into a short-term Buy rating.

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